Tyler and Cameron Winklevoss, the twin brothers from Harvard who sued Mark Zuckerberg over the intellectual property for Facebook, are back again with the next big thing ...

... but not really.

On July 1, the Winklevosses submitted form S-1 to the Securities and Exchange Commission ("SEC") to register an exchange-traded fund ("ETF") that, according to documents, "will represent a cost-effective and convenient means to access exposure to Bitcoins" for retail investors. Two things: Bitcoin is a digital currency that first popped up in 2009 as a means for individuals to buy and sell goods and services anonymously via peer-to-peer systems outside the regulation of any government; an ETF trades like any other stock on an exchange, but instead of representing a share of a company, it represents a share of a basket of stocks or commodities. And in this case, a share of the Winklevoss Bitcoin Trust ETF will represent a share of some Bitcoins.

Matthew O'Brien at the Atlantic has a great piece back in April on why Bitcoin is not a currency but a pure bet. I have to agree. Simply looking at the chart above, one can clearly see that price stability is not something Bitcoin has experienced recently (over the month of June, Bitcoin lost 25% of its value against the dollar). Currencies work best when their purchasing power remains stable day-to-day, week-to-week, and month-to-month, so that users can reasonably expect to buy the same goods and services without much worry. Imagine buying a Coca-Cola for $1, then $5 the next week, and then $3 dollars the following, and then $7, and so on. Not very good.

Investors, then, are hoping that Bitcoin represents not the currency of the future, but something of the future. What that is exactly, it is hard to say, but Bitcoin bears greater resemblance to a speculative investment than to the U.S. dollar. In fact, the run-up in dollar prices this year strongly correlates with the volume of Google searches for Bitcoins, meaning that as more and more individuals become aware of Bitcoin, more and more people have demanded to own Bitcoins, despite that nothing has significantly changed about its function. When prices detach from fundamental value (pop pop pop), the result is a bubble.

Which brings us back to the Winkelvoss Bitcoin Trust ETF. What exactly will interested buyers in the proposed ETF be getting for their dollars? (Spoiler alert: very little.) Reading the risk section of the prospectus details the amazing uphill battle the ETF faces in both coming to market and growing in value:

1. Regulatory uncertainty: The SEC, the Commodity Futures Trading Commision ("CFTC"), and the Financial Crimes Enforcement Network ("FinCEN") among others have not issued a final ruling on Bitcoin, and can decide that Bitcoin poses more costs than benefits and thus shut it down. The big risk here is that FinCEN will rule that Bitcoin is a "money transmitter" under the Bank Secrecy Act, meaning that people are using Bitcoin to launder money and buy and sell illegal goods and services (aka drugs and terrorism).

2. Slow or decreasing growth in retail use: Companies like PayPal and Amazon are considering using Bitcoin as a means of online payment. These companies might accept Bitcoins in the future. And this decision largely rests on how regulators choose to deal with Bitcoin. Without growing use in commercial transactions with established companies, Bitcoin is unlikely to see its value increase.

3. Bitcoin exchanges are susceptible to malware, viruses, fraud, and failure: Bitcoin is a digital currency, created through a series of complex algorithms, and traded and stored on computer servers around the world. Bitcoin exists in a digital world, and if the digital world were to collapse due to an exogenous factor like a virus, Bitcoins vanish with it. Investors will not get their Bitcoins back, as there is nothing like an FDIC insurance guarantee, precisely because Bitcoin was initially created to exist outside a regulatory environment.

And the list goes on for another 18 pages ...

Now, there is a non-zero probability that Bitcoin is the next big thing. I cannot say for certain whether Bitcoin will fail or succeed. I can only offer my probabilistic expectation about Bitcoin's future prospects. But to me, investors in the Winklevoss's ETF are not buying exposure to digital currency, but a gamble with large tail risks and little upside.